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Miton's Moore: don't be bearish, divis will drive bulls

Investor confidence in the UK stock market has plunged, but Miton's Eric Moore says the bull market has strong underpinnings in dividends.

 
Miton's Moore: don't be bearish, divis will drive bulls
 

Investor confidence in the UK stock market may have plunged, but Eric Moore, manager of the Miton Income fund, is taking heart from healthy dividend growth.

Moore said for all the woes facing the stock markets, such as fears of a 'no deal' Brexit, global trade wars and a China slowdown, ‘the building blocks of the equity market look OK’.

Moore said looking at the fundamentals of the market through the ‘prism of yield, income and dividend growth’ it was ‘robust’.

He focused on the yield of the FTSE All-Share that has always stood at around 3% to 4%, except in exceptional circumstances such as 2008 when the yield ‘burst out the top’ as the market correctly anticipated dividends would be cut.

‘We are at the top end [of the range] now, at 3.8%,’ he said. ‘I look at that and think, why worry? There are a million things to worry about on a headline level, but the valuation basis of the stock market ain’t one of them.’

The most significant trough in the FTSE All-Share came during the technology bubble, when it fell towards the 2% mark. Yields then ballooned in the dotcom crash, then reach even higher during the financial crisis, when they approached 5.5%.

Moore recalled that during the technology boom share shot up but dividends went ‘sideways’ which is the ‘definition of a bubble’ as share prices were ‘not supported by the income-generating characteristics of those equities’.

But since the financial crisis, shares have been rising in line with dividends and ‘the fundamentals suggest that capital values are supported by income characteristics’,' said Moore.

‘What we have been in now is a dividend bull market. We have seen good dividend growth and the share prices have moved to reflect that,’ said Moore. ‘But share prices have not run away in advance of anticipated further growth. [The market] is much more cautiously looking to see if it is going along with the dividend growth received… there is nothing to suggest the market is overstretched.’

The outlook for dividend growth remains ‘quite good’ in the UK, said Moore (pictured), as the dividend cover – a ratio of the company’s annual earnings to the amount paid out in dividends, where cover of 1 or below is worrying and 2 is ideal – has improved over the last year, especially in the FTSE 100 where it was ‘scarily below 1 and is now very healthily above 2’.

‘That is a significant improvement we’ve had in the last year or two and that shows dividend health is definitely improving,’ said Moore.

Much of the recovery has come from the mining sector where profits have improved and some from banking, still recuperating from the financial crisis. Moore said the resumption of dividends from Royal Bank of Scotland (RBS) represented a big breakthrough for the sector.

The FTSE 100's oil giants have meanwhile improved their dividend cover thanks to ‘[rising] oil prices and self-help’.

BP (BP) in July announced its first dividend rise in nearly four years, signalling a turning point following the Deepwater Horizon oil spill and the collapse in the price of Brent crude.

‘Despite the scary headlines, if you look at what drives shares in the long run, yield and dividend growth, there are reasons to be cheerful, and BP is part of that,’ he said.

Over five years to the end of August, the Miton Income fund has delivered 47.2%, versus a 41.2% average for funds in Citywire's UK Equity Income sector.

Moore's fund has returned 47.9% over five years against the 38.2% the Investment Association UK Equity Income sector average. 

3 comments so far. Why not have your say?

William Phillips

Sep 21, 2018 at 19:53

"...exceptional circumstances such as 2008 when the yield ‘burst out the top’ as the market correctly anticipated dividends would be cut."

And there were far fewer cuts than some think. A number of high-profile rescue rights issues, for an effective cut, and some freezing. But slashing across the board did not happen, despite the UK corporate sector making haste to repay debt because it wrongly thought interest rates would spike under Darling to defend sterling. By 2011 payouts were strongly up anew.

This time round it is about restoring cover. We are certainly seeing more dividend increases of 0-5% v. 5-10% a few years ago, which is not good news against inflation of 3-4%. But not much butchery of payouts either, and balance sheets are sounder than in 2007... with much cheaper debt service costs.

The All-Share yields 3.8%, which as Moore says is within the post-bear market range since the market bottomed in February 2009. Not sensational if dividend growth must cease in real terms for a while, but running returns on cash and bonds are a sick joke.

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Mikesmusing

Sep 22, 2018 at 16:59

“Investor confidence in the UK stock market may have plunged”. What’s the evidence for that? If it’s true, why haven’t UK equity prices plunged? Just because someone writes that confidence has plunged or Brexit will be a disaster doesn’t make it true...

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Stephen B.

Sep 22, 2018 at 17:12

Dividends on the all-share are strongly affected by the level of sterling. If a brexit deal is done sterling could well strengthen quite a bit which would have the effect of a dividend cut even if the companies continue to trade well.

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